Bridget Moss
Conduct, Redress and Standards Department
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
25 June 2012
Dear Bridget,
AFM Response to CP12/7, FSCS rule changes
1. I am writing in response to this consultation paper, on behalf of the Association of
Financial Mutuals. The objectives we seek from our response are to:


Highlight our support in general for the changes being proposed; and
Comment briefly on specific options relating to insurance.
2. The Association of Financial Mutuals (AFM) has 57 members and represents
mutual insurers and friendly societies in the UK. Between them, these
organisations manage the savings, protection and healthcare needs of 20 million
people, and have total funds under management of over £85 billion. Financial
Mutuals are member-owned organisations, and the nature of their ownership,
and the consequently lower prices, higher returns or better service that typically
result, make mutuals accessible and attractive to consumers. The mutual model
also encourages mutuals to act to support others that get into trouble; to date no
mutual insurer or friendly societies has need to draw on the FS Compensation
Scheme.
3. Whilst AFM members have not been users of the Service, we believe it is a vital
element of the regulatory landscape, in providing reassurance to consumers that
the system overall works fairly and such that consumers are properly protected.
A clear dimension of this is that consumers can expect to be paid quickly when
they have made a claim to the FSCS. We therefore fully support all the
proposals in Chapter 2 intended to help streamline the process and to enable
FSCS to pay income benefits at 100% until final arrangements are put in place.
4. Chapter 3 explores options for insurance protection, and FSA rightly points out
that there is very little factual evidence to explore the potential for and impact for
changing current arrangements. That said, where FSA is exploring different
options, we think it would have been instructive to have some sense of the
regulator’s own preferences.
1 AFM response to CP 12/07, FSCS rule changes
5. With regard to incentives to policyholders, we consider that increasing protection
in respect of premiums paid after a firm failure, from 90% to 100% (as proposed
in paragraph 3.10) would add unnecessary complexity and expense, without
adding anything really worthwhile for policyholders. Indeed a policyholder is likely
to be thoroughly confused by the differentiation! This proposal would also mean
firms would have to extend their disclosure of compensation arrangements in
sales literature, KFDs etc., which again would risk further confusing. We feel the
risk of consumers stopping premium payments to a failed firm, or of surrendering
policies, is very low. In the vast majority of cases it is likely that the first the
policyholders would be aware of the possibility of a firm failing would be when
they are told that another form had taken it over - or, in the mutual arena, when
they are asked to vote for a transfer of engagements at an AGM or EGM.
6. On the point about ascertaining the residence of policyholders at the time their
plans were taken out, this ought not to be an issue. We consider though that
FSCS should provide compensation or seek a transfer for ALL policies in force at
the time a firm fails, regardless of where its policyholders are living then, or
where they were domiciled at policy outset. This is surely what consumers would
expect to be the case, and this is what they would infer from the point-of-sale
disclosure of compensation arrangements, given that firms do not currently state
that the protection is not available to non-EEA residents. We do not believe that
any increase in FSCS costs of this would be significant.
7. In relation to subrogation to FSCS, we think this should be automatic, en bloc,
without the need for individual policyholders to assign their rights to FSCS. We
suggest that if FSCS should make any recovery in excess of the amounts paid to
policyholders (whether by way of contractual policy payments or compensation)
these amounts should not be paid to policyholders, but retained by FSCS, and be
used to offset costs incurred.
8. One point we would make is that whilst the FSCS regularly states in its
publications that it has engaged with relevant sectors, despite numerous
approaches to personnel at FSCS, AFM has never been invited to comment, or
to participate in discussions with FSCS. Whilst we envisage that the current
approach of mutuals looking after their own means the likelihood of needing
FSCS support remains very low, we have had to highlight on a number of
occasions in the recent past the inequities of the FSCS funding approach, which
we consider would have been mitigated by a better understanding of mutual
insurers and friendly societies. Offers to provide this understanding have not
been taken up.
9. We would be pleased to discuss further any of the issues raised by our response.
Yours sincerely,
Martin Shaw
Chief Executive
Association of Financial Mutuals
2
AFM response to CP12/07, FSCS rule changes, June 2012